BHEL order book to improve, but not its stock: AnandRathi

Amol Rao of Anand Rathi Institutional Research told CNBC-TV18 that BHEL still stands a very good chance of wining a significant portion of available power projects. However, he expects BHEL stock to remain under pressure despite order wins.

Amol Rao of Anand Rathi Institutional Research told CNBC-TV18 that BHEL still stands a very good chance of wining a significant portion of available power projects. However, he expects BHEL stock to remain under pressure despite order wins.

BHEL is suffering from an overhang and the perception is that the capex cycle in the country has come to a complete halt

Amol Rao

Research Analyst

AnandRathi

Shares of Bharat Heavy Electricals have fallen nearly 13 percent in the last two trading session, wiping-off over Rs 6,000 crore from its market value, amid investor concerns over the sluggish pace of new orders.

Speaking to CNBC-TV18, Amol Rao analyst at Anand Rathi says the company currently is encountering headwinds on two accounts: 1) the interest rate gyrations occurring in the economy and 2) the fact that BHEL is always considered a proxy to national capex.

He believes that BHEL still stands a very good chance of wining a significant portion of available power projects. However, Rao expects BHEL stock to remain under pressure despite order wins.

Q: We hear about collapse of orders because the coal blocks that have been allotted to some of the Bharat heavy Electricals Limited’s (BHEL) potential clients are being pulled back and therefore potentially the order book will look bad. What have you picked up? What is this 12-15 percent fall in the stock telling you?

A: We believe that BHEL currently is encountering headwinds on two accounts. 1) The interest rate gyration that is occurring currently in the economy. 2) The fact that BHEL is always considered a national capex proxy. So, with problems being encountered on the coal block front, the company is suffering from an overhang or the fact that people feel that power capacity would not be added.

However, let me add that there are selective and let us say very well known facts that are in the public domain that there are power projects, large scale power projects in the central and state sector that are continuing irrespective of these problems. We believe that BHEL stands a very good chance of buying a significant portion of these orders. So, while some of the concern is well founded, quite a bit of it is unfounded too.

Q: What is your sense of the stock itself at Rs 162 are you buying the stock or you would think that this course had to play so you could see more near-term falls?

A: The stock is suffering from an overhang and the perception is that the capex cycle in the country has come to a complete halt. While the perception is partly correct we do believe that BHEL will continue to suffer despite winning certain orders in the next couple of quarters. Yes, the stock would be under pressure in the near-term.

Q: What about the valuations of the stock, are they at a big discount to its intrinsic worth, trading at somewhere around 1.2 times FY14 price to book, how are you valuing this stock and purely on that parameter how do you approach it?

A: On a price to book basis, it is around 1.1-1.2 times. I believe that for a company the size of BHEL, this is extremely good but given the interest rate problems that we are encountering currently in the market, this would see some amount of de-rating in the near-term.

Fundamentally speaking the company is near its trough valuations, which coincides quite significantly with the last trough that it saw in 2001-2002. So yes, from a valuation perspective, this stock is trading near its historical lows. I believe that this looks very attractive from a valuation perspective purely. Even if you look at it from fundamental perspective, a company of 20,000 megawatts (MW) at its disposal would be in a significantly stronger position to deliver or secure orders in the foreseeable future in comparison to a lot of its competitors.

Q: You spoke about several factors like the capex cycle going for a toss and the freshly emerging interest rate issues logically this should affect the entire space but we have not seen that kind of a decimation of Larsen and Turbo at all?

A:L&T is a company which has significantly diversified revenue streams and is not focused purely on the boiler, turbine generator (BTG) play for its revenues or for its cash flows. Whereas, BHEL could be perceived by that logic to be a single stream or a single product company. It relies completely on BTG or the industrial orders from the power segment to sustain its cash flows as well as its operations.

It would not be too fair to compare the two companies in terms of pure operations.

BHEL stock price

On March 03, 2015, Bharat Heavy Electricals closed at Rs 273.95, up Rs 0.15, or 0.05 percent. The 52-week high of the share was Rs 299.50 and the 52-week low was Rs 161.40.

The company's trailing 12-month (TTM) EPS was at Rs 9.71 per share as per the quarter ended December 2014. The stock's price-to-earnings (P/E) ratio was 28.21. The latest book value of the company is Rs 135.02 per share. At current value, the price-to-book value of the company is 2.03.